2013 – Page 4 – Consumer Financial Services Watch

Bibbidi Bobbidi Boo: Eminent Domain Needs More Than a Magic Wand to Overcome Title Defects

Jul 24 2013

Title issues that arise by virtue of the controversial use of eminent domain could impair the sale or insurance of residential mortgage loans but have received scant attention. A city seizes “underwater” loans through eminent domain, waves its magic wand, says Abracadabra or Bibbidi Bobbidi Boo, and then the mortgage lien of the prior loan holder evaporates into thin air. The city is free to write down loan principal and, for a fee, arrange for private interests to refinance the no longer underwater loan for a grateful borrower. In this land of make believe, the prior holder accepts the city’s offer of reasonable compensation without a fight. Yeah, right! The more likely result is that holders of seized mortgages will resort to litigation to stop the governmental seizure of their loans. Regardless of the ultimate outcome of that litigation, the mere filing of litigation could cloud title on the new refinancings and make them unmarketable and uninsurable. Read more to see why.

To read the full alert, click here.

Cordray Confirmed as Director of CFPB

Jul 18 2013

By: Kristie D. Kully, *Nathan Pysno
*Mr. Pysno is admitted only in Maryland / Not admitted in D.C.

On July 16, 2013, the Senate confirmed Richard Cordray as the first Director of the Consumer Financial Protection Bureau. The 66-34 vote to confirm Cordray ends nearly two years of uncertainty over his position. Read More

Will the CFPB Give Credit Where Credit Is Due? It Depends on the Circumstances

Jul 15 2013

By: Melanie Brody, Stephanie C. Robinson, Amanda D. Gossai

The Consumer Financial Protection Bureau (CFPB or Bureau) recently elaborated on some of the factors it will consider in determining what actions to bring, if any, against those subject to its enforcement authority. In a bulletin very reminiscent of the Securities and Exchange Commission’s so-called Seaboard Report, the CFPB announced that it may consider a party’s conduct favorably if the conduct “substantially exceeds” what is required by law in its interactions with the Bureau. Specifically, the CFPB “may” in its discretion award some form of affirmative credit in an enforcement action, such as potentially reducing the sanctions or penalties it seeks, if a party meaningfully engages in responsible business conduct.

Like the SEC’s Seaboard Report, CFPB Bulletin 2013-06 – while encouraging responsible business conduct – is full of caveats. The CFPB makes no promises in the bulletin. No matter how “substantial” or “meaningful” a party’s responsible business conduct in the course of an investigation, the Bureau’s evaluation will depend on the circumstances. Whatever “best protects consumers” is ultimately the Bureau’s main priority, because consumer protection is its singular purpose.

The bulletin lays out four broad categories of responsible business conduct: self-policing for potential violations, self-reporting to the CFPB, remediating any harm resulting from violations, and cooperating in investigations beyond what the law requires. In many cases mirroring the language of the Seaboard Report, the CFPB lists some of the factors it will consider in determining whether and how much to take into account those four categories of conduct.

Self-policing: Some of the factors the CFPB will consider are the nature of the violation, whether senior management turned a blind eye toward obvious indicia of misconduct, and whether the conduct was pervasive or an isolated act. Unlike the Seaboard Report, the bulletin also poses the question, “Was the conduct significant to the party’s profitability or business model?”
Self-reporting: The CFPB particularly emphasizes this category because self-reporting reduces the need for the CFPB to expend its own resources. In deciding whether to favorably consider self-reporting of violations or potential violations of federal consumer financial laws, the CFPB will consider, among other things, whether affected consumers received appropriate information related to the violations or potential violations within a reasonable period. The CFPB may be less inclined to consider self-reporting favorably if the party waited to report the violation until the disclosure was likely to happen anyway through, for example, impending supervisory activity.
Remediation: Remediation involves stopping the misconduct immediately, implementing an effective response that includes disciplining individuals responsible for the misconduct, preserving information, and redressing the harm. The CFPB will consider whether the party improved its internal controls and procedures to “remove harmful incentives” and “encourage proper compliance.”
Cooperation: It appears that a party will have to really, really cooperate for the Bureau to reward it with affirmative credit. To receive credit for cooperation, a party cannot just meet its obligations under the law. Rather, it must take “substantial and material steps above and beyond what the law requires” in interacting with the CFPB. The CFPB will ask whether the party cooperated promptly and completely throughout the course of the investigation, and whether it conducted (or hired an unbiased third party to conduct) a full and impartial internal investigation and promptly provided the CFPB with a thorough written report of its findings.

How the CFPB will in practice choose to apply the principles outlined in the bulletin remains to be seen. At the end of the day, there is no magic formula, no rule, and no promise. To quote the SEC in its Seaboard Report, “[b]y definition, enforcement judgments are just that – judgments.”

Guilty Unless Proven Innocent: FHA’s Potential New Enforcement Regime

Jul 12 2013

By: Phillip L. Schulman, Krista Cooley

The use of statistical sampling to evidence compliance violations without actually performing loan level reviews is at the center of a new enforcement regime that the U.S. Department of Housing and Urban Development (“HUD” or “Department”) announced on Tuesday it is considering to monitor and sanction Federal Housing Administration (“FHA”) approved mortgagees. The announcement, published as a Notice in the Federal Register, raises a host of questions, not the least of which is how HUD will implement these proposed enforcement efforts given the potential draconian consequences for FHA program participants. Those who already perceive that the risks of doing business with the federal government are increasingly excessive, should sit up and take notice. HUD has offered lenders 60 days to comment on the Notice, and lenders would be wise to carefully consider the changes and make their voices heard.

To read the full alert, click here.

Appeals Court Strikes Down Labor Department’s Interpretation Regarding Exempt Status of Mortgage Loan Officers

Jul 12 2013

By: Thomas H. Petrides , John L. Longstreth

In a victory for the Mortgage Bankers Association (“MBA”), a federal Court of Appeals has vacated an “Administrator’s Interpretation” issued in 2010 by the U.S. Department of Labor Wage and Hour Division (“DOL”) regarding the non-exempt status of mortgage loan officers. This court decision reinstates a prior Opinion Letter issued by the DOL in 2006 that had concluded loan officers in the mortgage banking industry generally may qualify as exempt from overtime under the administrative exemption of the federal Fair Labor Standards Act (“FLSA”). MBA had challenged the contrary 2010 Interpretation because it had been issued by the DOL without first conducting the “notice and comment” rulemaking process required under the Administrative Procedure Act (“APA”). The Appeals Court agreed with the MBA, but took no position on the merits of whether mortgage loan officers may in fact qualify under the administrative exemption to be exempt from the payment of overtime wages. Thus, the DOL may subsequently readopt the 2010 Interpretation after conducting the proper rulemaking procedures. In the interim, however, mortgage industry employers may choose to rely on the 2006 Opinion Letter to potentially escape overtime liability regarding their loan officers if they follow the guidance of that letter.

To read the full alert, click here.

CFPB Tweaks Ability to Repay Rule for Small Portfolio Creditors, Housing Assistance Programs, and Nonprofits

Jul 02 2013

By: Kristie D. Kully , Andrew L. Caplan

On May 29, 2013, the CFPB finalized certain amendments to its January 2013 Ability to Repay/Qualified Mortgage Rule. In addition to clarifying how loan originator compensation will be factored into the QM’s three percent limit on points and fees (as discussed in a recent K&L Gates Consumer Financial Services Watch blog post), the May 2013 amendments (which will become effective at the same time as the QM Rule, in January 2014) will exempt new categories of creditors and transactions from the Rule’s ability to repay requirements; expand the definition of QM to include a new set of loans made by small portfolio lenders; and create a two-year window in which certain balloon payment loans will enjoy QM status, without requiring that such loans be made to borrowers in rural or underserved areas. Read More

FHA Seeks Statutory Authority to Transfer Mortgage Servicing Rights

Jun 21 2013

By: Laurence E. Platt, Kathryn M. Baugher

For at least the third time in recent months, the Federal Housing Administration (“FHA”) has asked Congress for legislative authority to force underperforming loan servicers to transfer the servicing of FHA-insured loans to another servicer.

FHA Requests for Authority to Transfer Servicing

FHA’s latest request came on June 4, 2013, when FHA Commissioner Carol Galante testified before the Senate Committee on Appropriations. In her written testimony, she proposed that Congress provide legislative authority for FHA to require the transfer of servicing “when a servicer is at or below a servicer tier ranking score (TRS) of III, or when the Secretary deems the action necessary to protect the interests of the MMI [Mutual Mortgage Insurance] Fund.” Under these circumstances, FHA would like the power to “(1) transfer servicing from the current servicer to a specialty servicer designated by FHA; (2) require a servicer to enter into a sub-servicing arrangement with an entity identified by FHA; and/or (3) require a servicer to engage a third-party contractor to assist in some aspect of loss mitigation (e.g. borrower outreach).”

At the hearing, Commissioner Galante indicated that some servicers appear to be meeting individual loss mitigation requirements, but their portfolios still have a lower rate of successful loan modifications relative to other servicers. Commissioner Galante stated that there appears to be “something deeper going on” with these servicers that FHA reviews are unable to identify. In situations where FHA cannot get the servicer to improve loss mitigation outcomes “through other means,” FHA would like to require a transfer of servicing.

While Commissioner Galante’s testimony created some buzz in industry publications, her proposal is not a new one. In fact, FHA made identical requests in November and December of 2012. In December 2012, for example, U.S. Department of Housing and Urban Development Secretary Shaun Donovan called the requested authority “a critical step,” and said that it would “send a very strong message to those servicers that are underperforming.” Secretary Donovan also made clear that FHA needs legislative authority in order to force the transfer of servicing as proposed.

Risks Associated with FHA’s Proposal

In making this legislative request, FHA did not discuss the interplay between FHA and Ginnie Mae, or the impact that FHA authority to transfer servicing might have on Ginnie Mae. While FHA insures certain of the pooled mortgage loans underlying Ginnie Mae securities, FHA is not a counter-party to the servicing agreements for such loans. In the ordinary course, Ginnie Mae would be the counter-party under the Guaranty Agreements pursuant to which Ginnie Mae guarantees the servicer’s (or in Ginnie Mae parlance, the “issuer’s”) payment obligations to security holders. Thus, any remedy demanded by FHA will have a ripple effect on the Ginnie Mae servicing rights. In addition, any requirement to transfer servicing or appoint a sub-servicer presumably would have to be accomplished in accordance with Ginnie Mae guidelines.

The risk of FHA forcing a transfer of servicing may dilute the value of the contract right to service, because the servicer may be forced into a distressed sale, particularly if the required time period for the transfer is short. It may lead to a cross-default under other commercial agreements, such as a revolving credit agreement that financed the acquisition or holding of such rights. If it is deemed to be a regulatory action or sanction, FHA’s requirement may have an adverse impact on state mortgage servicing and origination licenses. And the circumstances that give rise to the forced transfer of servicing or appointment of a sub-servicer might be used by Ginnie Mae as an event of default under the Guaranty Agreement and provide an independent basis for Ginnie Mae to terminate the servicing (“issuer responsibility”) with cause.

The bottom line is that FHA’s request for new statutory authority should be carefully considered. While a requirement to transfer servicing is a less drastic alternative than the loss of FHA approval from the perspective of an approved mortgagee, the inability to realize fair market value for the mortgage servicing rights in question could have a significant adverse effect on a servicer. We would hope that any proposed legislation in this area would not authorize FHA to impair valuable mortgage servicing rights without, at a minimum, building in robust “due process” protections and standards of materiality or material adverse effect.

HUD Renewal and Recertification

Jun 19 2013

By: Stacey L. Riggin
*Ms. Riggin is not admitted to the practice of law.

The U.S. Department of Housing and Urban Development published notice in the Federal Register on June 18, 2013 that it is seeking public comments on the information used by FHA to verify that lenders meet all approval, renewal, update and compliance requirements. The notice solicits comments on ways to enhance the quality, utility, and clarity of the information and to minimize the burden of the collection of information on those who are to respond, such as electronic submission of responses. Read More

Supreme Court Takes Mount Holly Disparate Impact Case

Jun 17 2013

By: Stephanie C. Robinson

Today, the Supreme Court granted certiorari in the appeal titled Township of Mount Holly, New Jersey v. Mt. Holly Gardens Citizens in Action, Inc., et al., No. 11-1507, agreeing to consider whether the Fair Housing Act allows claims under the disparate impact theory of discrimination. The disparate impact doctrine imposes liability on defendants for actions undertaken without discriminatory intent but which nonetheless have an allegedly disproportionately harmful effect on protected classes of persons.

CFPB’s RESPA Radar Pointed at Affiliated Business Arrangements

By: Holly Spencer Bunting

Have you been wondering whether the Consumer Financial Protection Bureau (“CFPB”) is focusing its enforcement efforts on the Real Estate Settlement Procedures Act (“RESPA” or “Act”)? After the public announcement of two RESPA-related consent orders, the answer is yes. And, given the alleged facts of the most-recent settlement, that focus is on a familiar topic – affiliated business arrangements.

To read the full alert, click here.

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